Those of you who were present (or born) about one and half decades ago would remember the first dot com bubble and how it had burst to ravage hundreds and thousands of lives, leaving indelible emotional, financial as well as professional scars on IT workforce.
In last 15 years, that same IT bubble has burgeoned again, reaching bursting proportions, even though the burst is not visible to everyone right away.
Most IT entrepreneurs from silicon valley invested money and effort to create a business that had an indirect value to someone else, even though it did not have its own cash registers ringing like temple bells. This indirect value, or let’s call it ‘potential for profit’ was what the big investors fell for, and gave them money (as funding). After reaching a reasonable size and having a few obnoxious hundred millions as investments, half of which was probably spent in creating a marketing hype for that start-up, the founders were able to do a profitable exit, handing over the product to some BigCompany to handle.
To all these entrepreneurs, this was the end point of their business, and it had a happy ending. They lived happily ever after (or worse, became advisors on how to create, attract funding and sell such a start-up, perpetuating this culture). The crazy amounts of money these 20-something CEOs made, brought in a full wave of such start-ups and the big companies never hesitated to invest a few billions of their shareholders’ wealth into buying such start-ups or their HyperProducts.
Did those HyperProducts ever bring or realise that value? Did they even break-even?Heck, No! Well, may be in some cases, but mostly not. Hotmail was the first example. It seems the whole universe conspired to make Bhatia a billionaire. After that, Hotmail simply sank in the hands of Microsoft. Another example has been Skype. Microsoft, as expected, managed to do nothing real about Skype’s potential except for renaming Lync to Skype-for-business (as if we had a skype-for-pleasure version, too)
Piknik in the hands of Google had the same fate, now obscured to a toolbar in photos. Whatsapp, for what it was worth, is still giving headaches to finance guys about how will 18 billion be realised out of it. In conclusion to this part, i would say that most of these companies and their HypeProducts, which had super inflated valuations, never really realised the potential and most of the big boyz ‘managed’ the losses.
But how will this create a dot com bubble burst?
Let us cross over to the other side of the table.
These start-ups which had created those HyperProducts that gave them billions in valuations were always focused on developing that ‘thing’ which would make them look valuable in the eyes of a bunch of targeted BigCompany (ies). This ‘thing’ was mostly a user base, user browsing habits, online behaviour data, proof of concept of the need for something etc. And that’s all that they did. They never really built proper sales channels, support strategies, long term product maintenance, next level ramp-up strategies, and worst a multi-product portfolio. All these need to be a core part of any real product company. But when seen valuable in the terms of generating that ‘thing’ related value, they simply got bought out without ever building any of those components for that HyperProduct.
Now let us see what happened to that HyperProduct AFTER THE BUYOUT inside that big company.
After investing a few billions in buying this HyperProduct, the BigCompany would give one of its senior leaders a mandate to make it work, make it profitable and show returns on it. When this leader analyses that the HyperProduct has actually got no sales channel and there are just a handful willing to pay a monthly subscription or a license cost either, he sees how his own ass is now online. So what does he do?
He simply follows what the entrepreneur had done, and becomes intrapreneur.
They start calling this HyperProduct a base launchpad for their company’s other products to utilise. As an example, if the HyperProduct had been bought for user base, the leader would now say that they can expose this big user base to their own generic products. Or worse, buy more products suitable to that demographic and expose it to this user base. Once again, they can see that there is no possibility to sell anything from HyperProduct, so they try to prove that its utility is indirect; thus immeasurable in any direct way.
Why will their management agree to such hedging?
The management agrees to it coz they were the guyz who had given big nods for buying the HyperProduct in the first place. Its immediate failure will be pinned on them by the board of directors and shareholders, if any. So they need to have a strategy with which this HyperProduct can survive as something for next three years, all this while creating a perception of success. If its profitability cannot be proved, they can always justify it against utility (like skype for business). So they shell out more money to buy a few more products, or allow to hire teams to build a few products, that can be built using HyperProduct or exposed to its user base or get linked to it directly or indirectly.
The HyperProduct never really sells or bring in more money. For all its worth, its use may decline, it may go completely awry and may die very soon. But that is OK. The big boyz can show that it was put to the exact use they wanted it for (see Piknik in Google).
12 months have passed and the intrapreneur is now doing more acquisitions to support HyperProduct. The SuperProduct that he now acquires can utilise HyperProduct’s first twenty lines of code. The new SuperProduct now becomes the cynosure of everyone’s eyes. Everyone is distracted from HyperProduct. Also everyone knows that SuperProduct exists on top of HyperProduct, so naturally the latter is invaluable. Thus HyperProduct is accepted, de facto, as a part of the company’s bouquet of products and is still given a lot of value because after all, the SuperProduct, the new hero, uses it as backbone (No one tells that it was just the first twenty lines of code).
Another 12 months pass. The Intrapreneur has now proven his value to the organisation. The management has given a sigh of relief that the blunder of buying HyperProduct was never revealed coz of the hard work by Intrapreneur, no matter how many millions were spent to buy the SuperProduct, just to make that HyperProduct look good. The intrapreneur now quickly gets a promotion and hands over the reigns of HyperProduct and SuperProduct to someone new. Happy ending for management. Happy ending for Intrapreneur.
What about the new guy who inherited HyperProduct?
He immediately starts saying that HyperProduct is based on old technology, which is like 3-4 years old and its becoming technically impossible to maintain it, not to mention very expensive. Even programmers for that technology are now obsolete. To prove his point, he hires a Big4 consultant to do this analysis and they give him a favorable report. With this report in hand, the new intrapreneur manages to get a nod from management to declare the HyperProduct as End of life and goes in search to buy its new age replacement.
The cycle then repeats.
But if everyone is having a happy ending, why will this bubble burst? I still haven’t answered that.
Actually its quite simple. The amount of money wasted into such wild geese chases is simply chipping hard at the bottom lines of these big companies. These buy outs are usually a stop gap measure to maintain a perception of being in sync with the markets in the eyes of shareholders and market alike, so as to maintain the valuation of the BigCompany. But it also chips away the profit margins and hits the bottomline. And when that gets revealed, the perceived value anyway erodes in the share market.
The money is disproportionately flowing in directions where it is becoming unproductive eventually impacting the economy. Equate it to sharemarket where shares are sold and bought on the perception about a company and not its real revenue. But then we all know that share market is not a productive market but a speculative one. It rises and falls on emotions and perceptions, fears and dreads. And that is why these markets have the potential to crash overnight and erase billions of dollars’ value over night from an average investor’s kitty.
The same is true for these HyperProducts, which are being traded like shares that have a lot of perceived value. As long as the perception lasts, the bull is raging. And its actually the big boyz who are perpetuating this by pumping in money for creating a market perception that they are there with the latest trends, technology and are leading market innovations. But they don’t have a bottomless pit of money to spend on this perception management exercise. Sooner or later, the dwindling bottomline will reduce their ability to indulge.
The moment these artificial perceptions created by big boys gets affected by emotions in the economy, the whole value chain, artificially created will crash faster than a pack of cards. And that will be our very own second dot com burst…
When will it happen?
There are certain pointers which are very early signs in the market. Some of these big HyperProducts never sold themselves but continued to try and convert themselves into profit n loss businesses. And some big names have been there. They are beginning to see that end of life for themselves. These signs are ominous. The whole industry is now witness to the facts that all these HyperProducts have only so much life in them. Actually the life is so short that sometimes they have not even spent the funding money. As people start acknowledging that the emperor is naked, the company boards will start questioning the motives behind such obnoxious buy outs based on notions, perceptions and emotions.
Of course, some buy outs will still continue because many a time, the companies will buy very nascent products to prove that they are trying to catch up with the competition or are trying to make a quick side-Alley entry into a market where they needed to be but had been sleeping awhile (like kodak in digital cameras), but more and more of these buy outs will start happening soon on the established sales channels and actual revenues.
What will the carnage look like this time?
While the first dot com burst was like world war II, full of blood bath, this one will be more like the current wars of the world. They will be insidious, not very apparent to the eye unless you look hard, guerrilla tactics, economic arm twisting and an occasional over night operation.
This time around, the fears will not be that of massive lay-offs and wholesale bankruptcy but in a more subtle way, the buy outs will start becoming more realistic. For employees, the euphoric salaries will disappear, the churn of employees, the ample market of IT jobs etc will all become more realistic as the IT companies will be forced towards a conventional way of proving their worth. In short, this time around, the burst will look like a market correction, bringing in accountability to the potential.
Keep your eyes open for all those single product companies, that have been around for a while and have not had a second product that has been as big a hit as the first one. They are the ones to watch out for.
Hint: look at your own installed applications and i can bet each of you can find three candidates there.
